Assistance and advice to a franchisee in financial difficulties

If a franchisee is in financial difficulties, for example due to disappointing market developments, a franchisor will have to provide the franchisee with assistance and advice.

A franchisee will also have to make the necessary extra efforts. In return for these extra efforts, the director could also demand a higher remuneration from his own franchise company. In a sense, this can have a counterproductive effect. After all, the costs will increase for the franchisee’s business. Nevertheless, it is not inconceivable that there are legitimate (consideration) costs involved. However, these (additional) costs could be in vain.  In the event of bankruptcy, there may also be a greater debt to the estate, which is to the detriment of the joint creditors. This in itself does not have to be a reason to assume liability on the part of the director. On the other hand, there may be a way in which a company on the verge of bankruptcy is emptied. This situation will qualify for sanctions. The curator has a variety of actions for this. Particularly, for example, if the withdrawals are not correctly administered.

This dichotomy was addressed in the judgment that will be discussed below. It is also important that the franchisor apparently played a role here. The franchisor apparently, in consultation with the franchisee, terminated the franchise agreement and provoked bankruptcy.

On October 28, 2015, the District Court of the Northern Netherlands rendered a judgment (ECLI:NL:RBNNE:2015:4964) on the liability of a director of a franchisee in bankruptcy. The franchisee had a franchise agreement with DGN Retail BV as franchisor to operate a hardware store under a franchise formula. The franchisor had terminated the franchise agreement due to the poor financial condition of the franchisee. Bankruptcy has also been provoked in consultation with the franchisor. Shortly afterwards, the franchisee was declared bankrupt. It turned out that the director had made a number of withdrawals from the BV and that these had not been properly processed in the administration.

The trustee is suing the director for, among other things (a) improper management (pursuant to Section 2:9 of the Dutch Civil Code) and due to (b) manifestly improper management due to violation of the accounting obligation (pursuant to Article 2:248 of the Dutch Civil Code read in conjunction with Article 2:10 of the Dutch Civil Code). The trustee also based his claim on an alleged (c) misleading representation of the company’s situation pursuant to Section 2:249 of the Dutch Civil Code.

Ad a) liability pursuant to Section 2:9 of the Dutch Civil Code

Liability under Section 2:9 of the Dutch Civil Code requires that the director can be blamed for serious misconduct. If it cannot be established that the withdrawals were justified, the court is of the opinion that serious blame can be made. This serious reproach lies in the fact that these are substantial, improperly accounted withdrawals. The court has established that in recent years there has been an inexplicable increase in management fees and administration costs prior to the bankruptcy. It is true that there is a shortcoming in the management task due to the failure to properly account for the withdrawals, but the court does not consider this violation of standards serious enough in that case to assume liability on the basis of Article 2:9 of the Dutch Civil Code. If it is established (in retrospect) that the withdrawals were justified, the court is of the opinion that it cannot be argued that serious blame can be made for this.

Ad b) liability pursuant to Article 2:248 of the Dutch Civil Code and 2:10 of the Dutch Civil Code

Manifestly improper management pursuant to Article 2:248 of the Dutch Civil Code can be said to exist in the event of obvious improper conduct in the performance of duties. If the board has not fulfilled its obligations to keep proper records under Article 2:10 of the Dutch Civil Code, it has performed its duties improperly and it is suspected that improper performance of duties is an important cause of the bankruptcy. If that is the case, the director is in principle liable for the shortfall in the estate.

However, insofar as the inadequate accountability of the withdrawals in the administration can be regarded as a violation of the obligation to keep records laid down in Article 2:10, the director has sufficiently dispelled the legal presumption that this caused the bankruptcy.

The franchisee has indicated that the franchisor and the franchisor were in fact the main creditors. The franchisor’s group had full insight into the disappointing turnover figures. It is not in dispute that the franchisee’s operating results have deteriorated due to competition and declining turnover. This was also the reason for the franchisor to terminate the franchise agreement. Subsequently, agreements were made between the franchisee and the franchisor about a controlled sale of the stock and subsequently about the initiation of the bankruptcy. In the opinion of the court, it has therefore not become plausible that the bankruptcy was partly caused by the (preliminarily assumed) improper performance of duties.

The court rules that the director cannot be held liable for the bankruptcy and thus for the shortfall in the estate, but only for the relevant withdrawals for which no adequate explanation has been given (preliminarily).

Re c) liability pursuant to Section 2:249 of the Dutch Civil Code

If an incorrect annual account gives a misleading representation of the situation of the company, the director is liable to third parties for damage suffered as a result, pursuant to Section 2:249 of the Dutch Civil Code.

The court rules that precisely because the withdrawals were not included in the annual accounts and it is assumed for the time being that these withdrawals were unjustified, this could not have caused any misrepresentation. This consideration is difficult to place. After all, it should be clear that if withdrawals are not included in the annual accounts, a wrong picture is created. That there is any causality in the bankruptcy is rejected by the court. Nor is there any prejudice to the joint creditors for whom the trustee is acting. As a result, there is therefore no question of directors’ liability on this ground, according to the court.

evidence to the contrary

The court rules that the director is allowed to provide evidence to the contrary that the withdrawals are incorrect. The court refers to the evidence to the contrary to be provided by the director against the suspicion that the withdrawals involve (manifest) improper management.

It will not be easy for the driver to demonstrate this. The director had already argued that the withdrawals due to the higher management fees and higher administration costs were caused by more time being spent on the construction market in connection with the deteriorating figures and the intensified contact with the franchisor’s group. In addition, the rates used for the management fee and administrative activities would be in line with the market.

The position of the franchisor

The franchisor may play an important role in the remainder of the procedure. For example, the franchisor could perhaps explain whether the extra efforts and contacts with the franchisor made by the director are recognised. The ruling also shows that the franchisor was aware of the disappointing development in turnover and that, in consultation with the franchisee, a coordinated termination of the franchise agreement and provoking bankruptcy was achieved. To what extent would the franchisor have been aware of the (unlawful or otherwise) withdrawals by the director?  

Franchisors could find themselves in a thorny issue when providing assistance and advice to a franchisee in financial difficulties. Especially if you cooperate or coordinate towards a situation in which bankruptcy is provoked. If any claims of the franchisor are paid in that situation and the claims of other creditors are not, the franchisor could also be at fault here. 

mr. AW Dolphijn – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.

Do you want to respond? Go to dolphijn@ludwigvandam.nl